Banka: How to maximize your medical expense tax deductions
Most of us know that in order to claim a medical item, the payment must have been made to a medical practitioner, a dentist or a registered nurse, or be for prescription medication.
We also know that the receipts must be for the current period.
Where people seem to get tripped up is when they think that they can deduct 100 per cent of their medical expenses.
Another thing that isn’t readily understood by many is medical expense receipts can be for any 12-month period as long as the ending period is sometime during the current calendar year.
Medical expenses can be taken by one spouse for both spouses, and also for your dependants even though they may no longer live with you.
The proof that the Canada Revenue Agency requires when taking the medical expense credit for a dependent is that you paid the expense.
Those people who participate in an extended health and dental plan can deduct the medical expense portion that is not covered by the plan.
For example, if your plan only covers 80 per cent of your expenses, the other 20 per cent would be tax deductible.
Alternatively, if your plan covers 100 per cent of your expenses, but doesn’t reimburse you for the first $200 every year, then that $200 would be deductible.
The medical expense credit is a non-refundable tax credit. What that means is that a credit is given to the taxpayer that will be deducted directly off their taxes payable based on certain criteria.
It is not refunded to the taxpayer.
If the taxpayer doesn’t have enough taxes owing to take the entire medical credit, the rest of the credit is lost.
The first stipulation of taking this credit is that the amount of medical expense needs to be greater than three per cent of your net income.
For example, if your net income (Line 236 on a tax return) is $45,000; then three per cent would be $1,350, so you would need to have more than $1,350 in medical receipts to get any sort of credit.
Here again is another tax planning tip for couples.
If one spouse makes less or very little income, it would make sense for that spouse to take the medical expense credit because there would be more medical expenses available for credit.
Continuing with the example above, if your spouse made $15,000 on line 236 of their return, then three per cent of that would be $450.
So if your total medical receipts for you and your spouse were $1,000, then you would not be able to deduct them yourself ($1000 - $1,350 = $0), but you would be able to deduct ($1,000 - $450 = $550) from your spouse’s return.
So, you would think at this point that you would get the $550 as the deduction. But that is not so.
This $550 becomes part of the rest of your other non-refundable tax credits, such as your basic personal deduction of 10,320, your CPP, deduction for children, home renovation tax credit deduction, pension deduction and others that might apply.
These credits are totaled together and then multiplied by 15 per cent, which is the amount that is taken off the federal and provincial taxes payable that were calculated from your taxable income amount.
In other words, you would only get 15 per cent of the $550, about $82.50, as a deduction.
To recap, we started with $1,000 in medical expenses and now have received a deduction of $82.50 of your spouse’s tax payable.
That is quite a difference, and the reason why you can’t count on the total of your medical expenses when trying to figure out if you will have to pay or get a refund, and how much that might be.
There have been a couple of significant changes to the deductibility of medical expenses.
The first one affects us this year and has to do with those over-the-counter items that might be prescribed by a doctor.
The rule now is that if you can buy it over-the-counter without a prescription, even if you have a prescription, the item will not be deductible.
There are still some exceptions to the rule.
The next pertains to cosmetic procedures. Even if performed by a doctor, such procedures will not be deductible unless they are required in the actual cure of a medical condition.
What do you need to bring your tax consultant? You need the actual medical receipt along with proof of payment.
The debit card slips by themselves are not accepted by CRA and will not qualify for the credit.
Most pharmacies are all computerized and will gladly print you out a yearly summary that you can bring to your accountant.
We can then use that summary on your medical expense claim and it will help to speed up the processing of your tax return.
Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.